by OverHeadWatch Team | May 27, 2019 | Business Tools, OverHead Analysis | 0 comments
It was back in the 18th century that Benjamin Franklin, arguably America’s most famous founding father wrote: “in this world nothing can be said to be certain, except death and taxes.” And while some may prefer death when every April 15th rolls around, the fact is that a majority of Americans are not taking full advantage of the ways to pay fewer taxes through a variety of legal tax write offs. So what is a tax write off?
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Tax Write Offs Vs. Standard Deductions
What Is A Tax Credit Vs. What Is A Tax Write Off?
14 Samples of What Is a Tax Write Off
5 Things You May Not Write Off
Tax Preparation: DIY Vs. Hiring
Tax Write Offs Vs. Standard Deductions
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The goal for taxpayers each year is to lessen their taxable income, which is the overall amount that the Internal Revenue Service (IRS) will make you pay taxes on. Most of the tax-paying population (2 out of 3 Americans as of 2017) only lower their tax burden initially with a standard deduction.
According to Forbes, for 2019, the standard Deduction will increase to $12,200 for individuals and $24,400 for those filing joint returns. But 1/3 of American taxpayers forego the standard deduction in favor of using legitimate tax write offs to further increase their non-taxable income dramatically and save significantly more money than the standard d
eduction allows. To discover just what is a tax write off, read on…
Laziness Is Expensive
As we noted, 2/3 of Americans accept the standard deduction at tax time, while 33% of us realize that “easier” can be very costly to our wallets. So join the 1/3 of Americans who use all the tax write offs that are available to us. It will take some organization throughout the year and longer to put together that next tax return, but the financial benefit will probably far exceed a little more time spent going over the numbers. And it gets easier with each passing year once you play the game rather than take the lazy way out.
What Is A Tax Credit Vs. What Is A Tax Write Off?
It’s also important to note that there are a variety of tax credits that can lower your tax burden, but while we use write offs to lower our taxable income, we use tax credits after we have determined what we will pay in taxes. For instance, if you itemized your tax write offs and lowered your taxable income and discover that you still owe $5,000 in taxes but you have a $3,000 tax credit, then you would apply the tax credit and pay only $2,000 in taxes instead of $5,000.
Who Can Use Tax Write Offs?
When researching “what is a tax write off,” you will find that there are three business entities that can use tax write offs: corporations, small businesses, and those of us who are self-employed. Individuals can also use write offs to lower their taxable income through various means. Anyone who pays taxes can benefit if they’re willing to take some extra preparation time.
14 Samples of What Is a Tax Write Off
While tax write offs may differ from state to state, we will focus on a few of the things that the IRS (i.e., federal government) allows taxpayers to deduct from their taxable income:
1) Child Care
When researching “what is a tax write off,” you will find that while you can’t write off your date night babysitters, if you use child care while you’re working you can write off up to 35% of those costs.
2) Aging Parent Dependants
Your parents once claimed you as a dependant, but if you are now caring for an elderly parent, you can claim them as a dependant. There are income restrictions and other criteria, but it is something to look into.
3) Medical And Dental Expenses
If you, your spouse, or any other dependant has medical or dental expenses that exceed 10% of your adjusted gross income, you can deduct these. And if you are self-employed and do not have insurance through your employer, you can deduct your health care premiums if they exceed 7.5% of your gross adjusted income.
4) IRA Contributions
You are entitled to write off your contribution to a traditional IRA as long as you or your spouse do not have a retirement account through your employer. You can deduct the entire allowable contribution, since you will pay taxes on this money once you withdraw it during your retirement years. The tax laws for a Roth IRA are the opposite (see below).
5) Student Loan Interest
Did your parents pay your student loan debt? If they did, the IRS considers this a gift to you and if your parents are not claiming you as a dependant you may deduct as much as $2,500 of the interest on that student loan.
6) Furthering Your Education
Through the Lifetime Learning credit, adults returning to college can save up to $2,000 per year when that education is leading to an improved professional skill set. You can write off some educational costs you incur and since that same education can cause a higher paying position, we call that a win-win!
7) Tuition
When researching “what is a tax write off,” you will find that you can also deduct up to $4,000 of higher education expenses. Sorry to those married couples who do not file joint tax returns as they are not eligible for this one.
8) Business Travel
If your employer does not reimburse you for travel costs, you can write off everything from transportation and luggage fees to meals, hotel costs, and business calls – but only if you are not being reimbursed, no double dipping!
9) Home Office Expenses
If you legitimately work out of your home and meet with clients in your home and house product inventory, you can write off part of your home expenses. Be sure to deduct new computer equipment and other office supplies, as long as they are only for work purposes.
10) Charitable Donations
If you donate cash to IRS-approved charities, you can deduct up to half of your adjusted gross income. Be sure to keep your receipts and bank statements if you use these write offs.
11) Theft or Disaster
If you lose household items to these calamities, you can deduct the value of those items on your taxes.
12) Job Hunting Expenses
It’s nice to know that during that horrible roller coaster period of looking for a job that you can deduct various expenses to offset your financial losses (and the headaches that often accompany that journey). Whether it’s mileage, postage, or even employment agency services, you can deduct these items and more.
13) Health Savings Account
HSAs are a great unsung tax shelter for those with high deductible health insurance plans. You can claim deductions on all the contributions you have made to your HSA.
14) Moving Expenses for Your First Job
It may sound bizarre but you can deduct the expenses you incur if you move over 50 miles for that first job out of college. Who thinks of these things, right? But it’s true. You can write off the expense of getting you and your stuff to that new place as you first step into the workforce.
5 Things You May Not Write Off
Just as there are legal write offs available to taxpayers, there are plenty of other expenses you may not write off on your taxes. Here are just a handful that might seem like you can write off but actually cannot:
1) Political Contributions
Considering what we seem to get from our politicians these days, perhaps it makes sense to not give a tax break for funding them.
2) Child Support
When researching “what is a tax write off,” you will find that ironically, alimony is deductible.
3) 529 Contributions
This is also known as an Educational Savings Plan.
4) Roth IRA Contributions
Since future disbursements from Roth IRAs are non-taxable, contributions to a Roth IRA are not deductible, unlike contributions to traditional IRAs where taxes are paid at the disbursement stage.
5) Unreimbursed Work Expenses
Taxpayers who are not self-employed can only deduct over 2% of their adjusted gross income.
Tax Preparation: DIY Vs. Hiring
In this day and age of self-prepared tax-related computer programs such as Turbo Tax, the question many people have is whether to do their own taxes or hire a tax accountant to do it for them. If your taxes are simple, you can most likely do it yourself using a program like Turbo Tax. If you’re completely in the dark and frightened to do it on your own, hiring a tax professional is the way to go.
However, merely hiring someone who may not understand your overall financial situation will not make things easier or even be as beneficial to you as it could be. Whichever path you choose you need to be organized and ready to detail and support all of your proposed tax write offs.
Look To The Future
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While it’s true that no one enjoys paying taxes and nearly all of us become frustrated with the complex and ever-changing tax code, that’s no reason to not take full advantage of tax write offs. Sure, you can use the standard deductions like 66% of Americans still do, or you can take advantage of what is available to drive down your taxable income that could result in an even bigger tax refund! Do the math and if you can use enough tax write offs to exceed the amount of the standard deduction, take advantage. Yes, it’s more work in the short-term but you may see that long-term gain. The choice is up to you.
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